Debt

9 Months Ended

Sep. 30, 2012

Debt [Abstract]

DEBT

NOTE 4—DEBT

As described in the Q2 10-Q, as of June 30, 2012, the Company was not in compliance with the consolidated leverage ratio covenant under its then-existing credit agreement (the “2011 Credit Agreement”). As a result, the 2011 Credit Agreement was amended, as of August 13, 2012, via a Waiver and First Amendment to Credit Agreement and First Amendment to Security Agreement (the “2012 Credit Agreement”), to among other things, waive such covenant default, amend the financial covenants applicable to the Company for future periods, and in consideration therefor, amend the terms of the facility. As of September 30, 2012, the Company was in compliance with the new financial covenants set forth in the 2012 Credit Agreement. As a result of the reasons described below under the section captioned “2012 Credit Agreement — Background”, on November 15, 2012, the 2012 Credit Agreement was amended, among other things, to amend the financial covenant requirements contained therein for future periods, and to extend the deadline to implement specified account control arrangements; until November 22, 2012 (as of the date of filing of this Quarterly Report on Form 10-Q (the “Q3 10-Q”), the Company has implemented such cash management arrangements, See below for a detailed description of the terms of the 2012 Credit Agreement and the November 2012 amendment thereto, including a description of the revised financial covenants applicable to the Company.

Prior to the execution of the 2012 Credit Agreement, and as permitted by applicable accounting standards, all of the Company’s indebtedness for borrowed money was classified as long-term debt. In connection with the execution of the 2012 Credit Agreement, however, the Company’s revolver was required to be reclassified as short-term debt. In addition, because part of the Company’s previously-outstanding revolver was converted into a term loan (see “2012 Credit Agreement” below), the then-current portion of such term loan was required to be classified as short-term debt as well. As a result, consolidated long-term debt at September 30, 2012 and December 31, 2011 consisted of the following (in thousands):

	September 30, 2012		December 31, 2011
Term Loan under 2012 Credit Agreement	$	21,900		n/a
Less current portion	$	4,380		n/a
Long-term debt*	$	17,520	$	49,490

* As of September 30, 2012, consists of a term loan (other than the current portion thereof) under the 2012 Credit Agreement, and as of December 31, 2011, consists of all amounts outstanding under the 2011 Credit Agreement (revolver only).

At September 30, 2012, an aggregate of $55.4 million was borrowed under the 2012 Credit Agreement ($21.9 million under the term loan thereunder and $33.5 million under the revolving facility thereunder). At December 31, 2011, an aggregate of $49.5 million was borrowed under the 2011 Credit Agreement.

As of September 30, 2012, under the 2012 Credit Agreement, the applicable interest rate margins for outstanding loans were: 3.00% for Eurodollar rate loans and 3.25% for base rate loans with respect to the revolving facility, and 8.00% for Eurodollar rate loans and 7.00% for base rate loans with respect to the term loan facility. The weighted average interest rates for the outstanding loans as of September 30, 2012 were as follows:

	At September 30, 2012
	LIBOR Loans			Base Rate Loans
Revolving Loan		3.11	%		5.25	%
Term Loan		8.23	%		10.25	%

2011 Credit Agreement

KID, specified domestic subsidiaries consisting of Kids Line, Sassy, LaJobi, CoCaLo, and I&J Holdco, Inc. (such entities collectively with KID, the “Borrowers”), and the subsidiaries of the Borrowers identified as guarantors therein, executed a Second Amended and Restated Credit Agreement (the “2011 Credit Agreement”) as of August 8, 2011, with certain financial institutions (the “Lenders”), including Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Book Manager. The 2011 Credit Agreement provided for an aggregate $175.0 million revolving credit facility, which was reduced, effective as of May 11, 2012, to a maximum aggregate of $100.0 million by notice from the Borrowers to the Administrative Agent, with a $25.0 million sub-facility for letters of credit, and a $5.0 million sub-facility for swing-line loans. A detailed description of the terms of the 2011 Credit Agreement can be found in Note 4 of the Notes to Unaudited Consolidated Financial Statements of the Q2 10-Q.

Financing costs associated with the 2011 Credit Agreement, in effect until August 13, 2012, were deferred and intended to be amortized over the contractual term of the 2011 Credit Agreement. As a result of the execution of the 2012 Credit Agreement, however, the Company incurred a non-cash charge of approximately $0.7 million in the third quarter of 2012 to write off a portion of the remaining unamortized deferred financing costs incurred in connection with the 2011 Credit Agreement.

2012 Credit Agreement

Background

As of August 13, 2012, KID, the Borrowers, and RB Trademark Holdco, LLC (a wholly-owned subsidiary of KID referred to as the “Licensor”), which as of such date is included in the definition of “Borrower”, executed a Waiver and First Amendment to Credit Agreement and First Amendment to Security Agreement (the “2012 Credit Agreement”) with the Lenders and the Administrative Agent. The obligations of the Borrowers under the 2012 Credit Agreement are joint and several. The 2012 Credit Agreement waived the covenant default as of June 30, 2012 described above, and amended and restated the 2011 Credit Agreement.

As described in more detail below, under the 2012 Credit Agreement, the Company is subject to a maximum monthly consolidated leverage ratio, and a minimum monthly consolidated fixed charge coverage ratio (the “2012 Financial Covenants”). As of September 30, 2012, the Company was in compliance with the 2012 Financial Covenants. As a result of the combined impact of: (i) overall softness in the business; (ii) accruals recorded in the quarter ended September 30, 2012 pertaining to costs associated with the voluntary recall of certain products; and (iii) the interruptions to the Company’s operations as a result of Hurricane Sandy (the full impact of which has not yet been ascertained), the Company determined that it would not likely be in compliance with one or both of the 2012 Financial Covenants for certain future monthly test periods. In addition, as a result of the business disruptions caused by such hurricane, the Company also determined that it would not be able to implement specified account control arrangements by November 15, 2012, as was required by the 2012 Credit Agreement (the “Cash Management Deadline”). In connection with the foregoing, on November 15, 2012, the 2012 Credit Agreement was amended (the “November Amendment”), among other things described below, to amend the 2012 Financial Covenants for future periods, and to extend the Cash Management Deadline until November 22, 2012 (as of the date of filing of this Q3 10-Q, the Company has implemented such cash management arrangements). The revised 2012 Financial Covenants are described in detail below.

In addition, prior to the November Amendment, as has been previously disclosed, in the event, among other things, that the Company failed to (i) deliver, on or before November 15, 2012 (the “Commitment Date”), a binding commitment letter with respect to a specified equity or subordinated debt infusion in an amount sufficient to satisfy the Company’s term loan in full, on terms reasonably acceptable to the Lenders holding a majority of the commitments under the 2012 Credit Agreement (the “Required Lenders”), or (ii) satisfy the Company’s term loan on or before December 15, 2012 (the “Satisfaction Date”), within 5 business days of any such failure, the financial advisor previously required to be retained by the Company must be retained in an executive capacity (the “Retained Executive”), with certain authority over operations. The November Amendment provides that the Commitment Date may be extended, in the discretion of the Administrative Agent, to one or more dates no later than November 30, 2012, and the Satisfaction Date may be extended, in the discretion of the Administrative Agent, to one or more dates no later than December 21, 2012 (the last of any such extensions to the Satisfaction Date, the “Extension Date”, which will remain December 15, 2012 for all purposes if no extension is granted) . As of November 15, 2012, the Administrative Agent has granted an extension of the Commitment Date to November 23, 2012.

With respect to fees, the November Amendment provides that the remaining unpaid balance of the Arrangement Fee (defined below) is payable on the first business day following the Extension Date (prior to the November Amendment, such balance was payable on December 16, 2012); provided, that: (x) if all outstanding obligations under the 2012 Credit Agreement have been satisfied in full on or prior to the Extension Date, such balance shall be waived in its entirety; and (y) if the term loan has been paid in full on or prior to the Extension Date, $57,000 of such balance shall be waived.

In addition, the November Amendment provides that to the extent the consent of all the Lenders is obtained (the November Amendment was executed by a majority but less than all of the Lenders): (i) the remaining unpaid balance of the Waiver and Amendment Fee (defined below) will be payable on the first business day following the Extension Date (without such consent, such balance will remain payable on December 16, 2012); provided, that: (x) if all outstanding obligations under the 2012 Credit Agreement have been satisfied in full on or prior to the Extension Date, such balance shall be waived in its entirety; and (y) if the term loan has been paid in full on or prior to the Extension Date, $57,000 of such balance shall be waived (without such consent, the applicable date to trigger such fee waivers will remain repayment by December 15, 2012); and (ii) in the event that the term loan has not been paid in full by the Extension Date, the Catch Up Fee (defined below) shall become payable (without such consent, the trigger for the Catch Up Fee will remain the failure to repay the term loan by December 15, 2012).

Finally, the November Amendment provides that to the extent the consent of all Lenders is obtained, if the term loan and all interest accrued thereon other than PIK Interest (defined below) is paid in full by the Extension Date, the PIK Interest will be waived (without such consent, the trigger for such waiver will remain repayment of the term loan prior to December 15, 2012).

Terms of the 2012 Credit Agreement, as amended by the November Amendment

Unless the context otherwise requires, the following is a description of the 2012 Credit Agreement, as amended by the November Amendment (the text indicates the changes effected by the November Amendment).

The 2012 Credit Agreement provides for: (i) an aggregate maximum $52.0 million revolving credit facility (the “2012 Revolver”), subject to a $47.0 million availability cap (which may be increased in $1.0 million increments up to a maximum of $5.0 million under specified circumstances), and borrowing base limitations based on 80% of eligible receivables, plus the lesser of $20.0 million and 55% of the value of eligible inventory (minus specified reserves, including for rent and dilution); (ii) a $5.0 million sub-facility for letters of credit; (iii) a sub-facility for swing-line loans in a maximum amount of $5.0 million; and (iv) a $23.0 million term loan (the “2012 Term Loan”). Upon execution of the 2012 Credit Agreement, $23.0 million of the amount outstanding under the Company’s previous revolver was converted into the 2012 Term Loan, and the remaining amounts continued as outstanding under the 2012 Revolver. KID’s previous ability to increase the amount of its revolver by up to $35.0 million under specified conditions was eliminated from the 2012 Credit Agreement.

Upon submission of the borrowing base certificate due on September 20, 2012, the Borrowers were required to make an immediate principal repayment in respect of the 2012 Term Loan in an amount equal to the amount by which the sum of the availability under the 2012 Revolver plus the Loan Parties’ cash and cash equivalents on such date exceeded $5.0 million (a $1.1 million payment was made). If at any time thereafter, the borrowing base is increased as a result of specified increases in eligible inventory, the Borrowers will be required to make an additional principal pay-down in the amount of such increase. Commencing September 30, 2012, the Borrowers are required to make monthly amortization payments on the 2012 Term Loan based on a 5-year amortization schedule (after giving effect to the September 20, 2012 payment described above). Amounts repaid on the 2012 Term Loan may not be reborrowed.

Loans under the 2012 Credit Agreement are required to be prepaid upon the occurrence, and with the proceeds, of certain transactions, including most asset sales or any debt or equity issuances, and in the amount of any increase in the availability cap. The maturity date of amounts outstanding under the 2012 Credit Agreement is April 1, 2014 (subject to customary early termination provisions).

The 2012 Revolver and the 2012 Term Loan bear interest, at the Borrowers’ option, at a specified base rate (the highest of (x) the Administrative Agent’s prime rate, (y) the Federal Funds rate plus 0.50%, and (c) a specified Eurodollar base rate plus 1.0%), or a specified Eurodollar rate based on specified British Bankers Association LIBOR, plus (in each case) applicable margins, and in the case of the 2012 Term Loan commencing on December 15, 2012 (but see below), an in-kind interest rate of 2% (“PIK Interest”), which may be accrued to the outstanding principal of the 2012 Term Loan. With respect to the 2012 Revolver, applicable margins range from 1.75% to 3.00% on Eurodollar rate loans and 0.75% to 2.00% on base rate loans, based on the Company’s Consolidated Leverage Ratio (as defined below) for the applicable trailing twelve month period. With respect to the 2012 Term Loan, the applicable margin is 8.0% on Eurodollar rate loans and 7.0% on base rate loans; provided further, that if the 2012 Term Loan and all interest accrued thereon other than PIK Interest is paid in full on or prior to December 15, 2012, the PIK Interest will be waived. The November Amendment provides that to the extent the consent of all the Lenders in obtained, such waiver will be triggered by repayment of the 2012 Term Loan prior to the Extension Date. Cash interest is to be paid, and PIK Interest is to be capitalized, on a monthly basis.

During the continuance of any default under the 2012 Credit Agreement, the applicable margin shall increase by 2% (subject, in all cases other than a default in the payment of principal, to the written consent of the Required Lenders) and prior written notice to KID).

The Borrowers may prepay the 2012 Revolver, the 2012 Term Loan and any swing-line loans at any time and from time to time without premium or penalty, and without a corresponding commitment reduction in the case of the 2012 Revolver. The unutilized portion of the 2012 Revolver may be reduced or terminated by the Borrowers at any time and from time to time without premium or penalty.

Prior to the November Amendment, commencing no later than November 15, 2012, substantially all cash, other than cash set aside for the benefit of employees (and certain other exceptions), would be required to be swept and applied to repayment of the 2012 Revolver. As a result of the November Amendment, the commencement date of this requirement was delayed until November 22, 2012 (as of the date of filing of this Q3 10-Q, the Company has implemented such cash management arrangements).

Under the terms of the 2012 Credit Agreement prior to the November Amendment, the 2012 Financial Covenants were as follows: (a) a maximum Consolidated Leverage Ratio (defined below) for the trailing twelve month period as of the end of each month in the following amounts: July 31, 2012: 6.25 to 1.0; August 31, 2012: 7.75 to 1.0; September 30, 2012: 6.75 to 1.0; October 31, 2012: 6.50 to 1.0; November 30, 2012: 5.75 to 1.0; December 31, 2012: 4.50 to 1.0; January 31, 2013: 5.00 to 1.0: February 28, 2013: 5.00 to 1.0; March 31, 2013: 4.25 to 1.0; April 30, 2013: 5.00 to 1.0; May 31, 2013: 4.25 to 1.0; June 30, 2013: 3.75 to 1.0; July 31, 2013: 4.00 to 1.0; August 31, 2013: 4:00 to 1.0; September 30, 2013: 3.50 to 1.0; October 31, 2013: 3.75 to 1.0; November 30, 2013: 3.75 to 1.0; and December 31, 2013 (and each trailing 12-month period thereafter): 3.25 to 1.0; and (b) a minimum Consolidated Fixed Charge Coverage Ratio (defined below) as of the end of each month in the following amounts: for the three months ending July 31, 2012: 1.50 to 1.0; for the three months ending August 31, 2012: 1.50 to 1.0; for the three months ending September 30, 2012: 1.40 to 1.0; for the four months ending October 31, 2012: 1.30 to 1.0; for the five months ending November 30, 2012: 1.30 to 1.0; for the six months ending December 31, 2012: 1.60 to 1.0; for the seven months ending January 31, 2013: 1.25 to 1.0; for the eight months ending February 28, 2013: 1.25 to 1.0; for the nine months ending March 31, 2013: 1.25 to 1.0; for the ten months ending April 30, 2013: 1.25 to 1.0; for the eleven months ending May 31, 2013: 1.25 to 1.0; and for the twelve months ending June 30, 2013, and each trailing twelve-month period thereafter: 1.25 to 1.0.

As a result of the November Amendment, the 2012 Financial Covenants were modified to required the following: (a) a maximum Consolidated Leverage Ratio for the trailing twelve month period as of the end of each month in the following amounts: September 30, 2012: 6.75 to 1.0; October 31, 2012: 6.65 to 1.0; November 30, 2012: 6.25 to 1.0; December 31, 2012: 5.00 to 1.0; January 31, 2013: 4.75 to 1.0: February 28, 2013: 4.50 to 1.0; March 31, 2013: 4.50 to 1.0; April 30, 2013: 4.25 to 1.0; May 31, 2013: 4.00 to 1.0; June 30, 2013: 4.00 to 1.0; July 31, 2013: 4.00 to 1.0; August 31, 2013: 3:75 to 1.0; September 30, 2013: 3.75 to 1.0; October 31, 2013: 3.50 to 1.0; November 30, 2013: 3.50 to 1.0; and December 31, 2013 (and each trailing 12-month period thereafter): 2.85 to 1.0; and (b) a minimum Consolidated Fixed Charge Coverage Ratio as of the end of each month in the following amounts: for the three months ending September 30, 2012: 1.40 to 1.0; for the four months ending October 31, 2012: 1.20 to 1.0; for the five months ending November 30, 2012: 0.90 to 1.0; for the six months ending December 31, 2012: 1.20 to 1.0; for the seven months ending January 31, 2013: 1.15 to 1.0; for the eight months ending February 28, 2013: 1.10 to 1.0; for the nine months ending March 31, 2013: 1.10 to 1.0; for the ten months ending April 30, 2013: 1.10 to 1.0; for the eleven months ending May 31, 2013: 1.05 to 1.0; for the twelve months ending June 30, 2013: 1.10 to 1.0; for the twelve months ending July 31, 2013: 1.10 to 1.0, for the twelve months ending August 31, 2013: 1.05 to 1.0; for the twelve months ending September 30, 2013: 1.10 to 1.0; for the twelve months ending October 31, 2013: 1.20 to 1.0; for the twelve months ending November 30, 2013: 1.25 to 1.0; and for the twelve months ending December 31, 2013 and each trailing twelve-month period thereafter: 1.25 to 1.0.

The 2012 Financial Covenants will revert to quarterly testing upon the last to occur of: (a) December 31, 2012; (b) the last day of the first trailing-twelve month period during which the Borrowers’ Consolidated Leverage Ratio is less than 3.00 to 1.00 and the Borrowers’ Consolidated Fixed Charge Coverage Ratio is greater than 1.50 to 1.00; (c) the date upon which the Borrowers’ reach definitive settlement agreements with U.S. Customs with respect to all outstanding specified anti-dumping/customs duty underpayments made by LaJobi, Kids Line, CoCaLo and Sassy (“Duty Events”); and (d) the repayment of the 2012 Term Loan in full.

The Consolidated Fixed Charge Coverage Ratio under the 2012 Credit Agreement means, as of any date of determination, the ratio of (a) Covenant EBITDA for the applicable period of computation (set forth above) minus the sum of (i) all unfinanced capital expenditures incurred during such period, (ii) all cash taxes paid by KID during such period, and (iii) all cash dividends paid by KID during such period, to (b) an amount generally equal to, with respect to the Company, the sum for such period of all scheduled interest and principal payments of debt, including the principal component of any capital lease paid or payable in cash plus any amounts paid during such period in respect of (i) all customs duties, interest, penalties and any other amounts payable to U.S. Customs by LaJobi, Kids Line, CoCaLo or Sassy, to the extent such amounts relate to Duty Events (“Duty Amounts”) or (ii) the earnout consideration in respect of KID’s 2008 acquisition of LaJobi (“LaJobi Earnout Consideration”), if any.

The Consolidated Leverage Ratio under the 2012 Credit Agreement is the ratio of the indebtedness of the Company to Covenant EBITDA for the trailing twelve-month period ending on the date of determination. Indebtedness, as used in the determination of the maximum Consolidated Leverage Ratio, generally means the outstanding principal amount of all debt (including obligations under capital leases plus the undrawn face amounts of all letters of credit, and excluding LaJobi Earnout Consideration and contractually agreed-upon payments related to Duty Amounts).

Covenant EBITDA, as defined in the 2012 Credit Agreement, is a non-GAAP financial measure used to determine relevant interest rate margins and the Borrowers’ compliance with the 2012 Financial Covenants, as well as the determination of whether certain repurchases of equity securities, acquisitions, payments of specified duty amounts underpayments, and payment of LaJobi Earnout Consideration, if any, can be made if other specified prerequisites are met, and the determination of the amount of specified fees. Covenant EBITDA for purposes of the 2012 Credit Agreement is defined generally as the net income of the Company (excluding extraordinary after-tax or non-cash non-recurring gains or losses, non-cash gains or losses from dispositions other than the write-down of current assets, non-cash restructuring charges, tax refunds, and net operating losses or other net tax benefits and any after tax gains and losses from discontinued operations), as adjusted for, to the extent deducted (added) in determining net income: (i) interest expense; (ii) income tax expense; (iii) depreciation; (iv) amortization; (v) other non-cash charges (gains); (vi) if expensed, reasonable costs incurred in connection with the execution of the 2012 Credit Agreement and Loan Documents thereunder; (vii) non-cash transaction losses (gains) due solely to fluctuations in currency values, in each case, during such period; and (viii) if accrued or expensed during or after the quarter ending December 31, 2010 (or in any prior period to the extent a restatement is required), (a) the amount of all Duty Amounts so accrued or expensed, (b) the amount of LaJobi Earnout Consideration, if any, paid in accordance with the terms of the 2012 Credit Agreement and (c) fees and expenses incurred by the Loan Parties in connection with the Loan Parties’ and any governmental authority’s investigation of the Duty Amounts and Duty Events, in an aggregate amount under clauses (a), (b) and (c) not to exceed the sum, for all periods, of (x) $14.855 million less (y) the amount of LaJobi Earnout Consideration, if any, paid, other than in accordance with the terms of the 2012 Credit Agreement and/or to the extent not deducted in determining consolidated net income. Notwithstanding the foregoing, the determination of Covenant EBITDA shall be subject to caps in respect of (i) professional fees and expenses incurred after July 1, 2012 that may be added back in the amount of $1,000,000 through September 30, 2012, $1,500,000 through December 31, 2012, $1,800,000 through December 31, 2013, plus all reasonable and necessary fees and expenses of the Retained Executive, if required to be retained in 2012, and (ii) restructuring costs that may be added back as determined by the Administrative Agent in its discretion. Pursuant to the November Amendment, the following additional adjustments may be made to net income in order to determine Covenant EBITDA: (i) expenses accrued during the month of September 2012 and (plus or minus any adjustments thereto in subsequent months to reflect actual expenses) and arising as a result of the recall of specified products, in an aggregate amount not to exceed $600,000 and (ii) actual costs incurred during the period from September 1, 2012 through December 31, 2012 arising from the wind-down of the Borrowers’ operations in the United Kingdom (See Note 7), in an aggregate amount not to exceed $100,000.

The 2012 Credit Agreement contains customary representations and warranties, as well as various affirmative and negative covenants in addition to the 2012 Financial Covenants, including, without limitation, financial reporting requirements, notice requirements with respect to specified events and required compliance certificates. In addition, among other restrictions, the Loan Parties (and their subsidiaries) are prohibited from consummating a merger or other fundamental change, paying dividends and making distributions, purchasing or redeeming stock, incurring additional debt or allowing liens to exist on its assets, making acquisitions, disposing of assets and other transactions outside of the ordinary course of business, making specified payments and investments, engaging in transactions with affiliates, paying Duty Amounts, or paying any LaJobi Earnout Consideration, subject in each case to specified exceptions, some of which are described below.

With respect to the payment by KID of dividends, among other things, after the 2012 Term Loan has been paid in full, so long as no event of default or unmatured event of default then exists or would result therefrom, and no violation of the 2012 Financial Covenants then exists or would result therefrom, KID would be permitted to pay a regular quarterly dividend, provided, however, that prior to such time that the “focused assessment” of U.S. Customs has been deemed concluded and all Duty Amounts required thereby have been remitted by LaJobi (the “Duty Conclusion Date”), such payments, when aggregated with permitted repurchases of KID’s equity securities as described below, is limited to an aggregate amount not to exceed $5.0 million.

With respect to the repurchase by KID of its equity securities, among other things, after the 2012 Term Loan has been paid in full, so long as no event of default or unmatured event of default then existed or would result therefrom, no violation of the 2012 Financial Covenants then exists or would, on a pro forma basis, result therefrom, and the Consolidated Leverage Ratio, on a pro forma basis, is at least 0.25x less than the maximum then permitted, KID would be permitted to repurchase or redeem its equity securities, provided, however, that prior to the Duty Conclusion Date, such payments, when aggregated with permitted quarterly dividends as described above, is limited to an aggregate amount not to exceed $5.0 million.

With respect to acquisitions, after the 2012 Term Loan has been paid in full, specified non-hostile acquisitions will be permitted (without a ceiling on the purchase price therefor), provided that, among other things, immediately before and after giving effect to such acquisition, no event of default or unmatured event of default would exist, the Loan Parties are in pro forma compliance with the 2012 Financial Covenants, the pro forma Consolidated Leverage Ratio is at least 0.25x less than the maximum level then permitted, and minimum availability under the 2011 Revolver is at least $15.0 million.

Generally with respect to the payment of LaJobi Earnout Consideration, any final judgment against the Borrowers in respect of thereof, and any required payments in respect thereof, would be governed through a judgment default threshold of $2.5 million.

The 2012 Credit Agreement also requires that the Borrowers provide the Administrative Agent with frequent and detailed financial reporting, projections and reconciliations.

Prior to the November Amendment, in the event, among other things, that the Borrowers failed to: (i) deliver, on or before November 15, 2012 (the “Commitment Date”), a binding commitment letter with respect to a specified equity or subordinated debt infusion in an amount sufficient to satisfy the 2012 Term Loan in full, on terms reasonably acceptable to the Required Lenders, or (ii) satisfy the 2012 Term Loan on or before December 15, 2012 (the “Satisfaction Date”), within 5 business days of any such failure, the financial advisor previously required to be retained by the Company must be retained in an executive capacity as the Retained Executive, with certain authority over operations. The November Amendment provides that the Commitment Date may be extended, in the discretion of the Administrative Agent, to one or more dates no later than November 30, 2012, and the Satisfaction Date may be extended, in the discretion of the Administrative Agent, to one or more dates no later than December 21, 2012 (the last of any such extensions to the Satisfaction Date, the “Extension Date, which will remain December 15, 2012 for all purposes if no such extension is granted”). As of November 15, 2012, the Administrative Agent has granted an extension of the Commitment Date to November 23, 2012.

The 2012 Credit Agreement contains customary events of default (including any failure to remain in compliance with the 2012 Financial Covenants, as amended by the November Amendment). If an event of default occurs and is continuing (in addition to default interest as described above, the requirement for all PIK interest to be paid in cash, and other remedies available to the Lenders), with the consent of the Required Lenders, the Administrative Agent is entitled to, and at the request of such Lenders, the Administrative Agent is required to, declare commitments under the 2012 Credit Agreement to be terminated, declare outstanding obligations thereunder to be due and payable, and/or demand cash collateralization of letters of credit (provided that upon events of bankruptcy, the commitments will be immediately due and payable, and the Borrowers will be required to cash collateralize letters of credit). In addition, an event of default under the 2012 Credit Agreement could result in a cross-default under certain license agreements that the Company maintains.

The 2012 Credit Agreement also contains customary conditions to lending, including that no default shall exist, or would result from any proposed extension of credit.

In order to secure the obligations of the Loan Parties under the 2012 Credit Agreement, each Loan Party has pledged 100% of the equity interests of its domestic subsidiaries, including a pledge of the capital stock of each Borrower (other than KID) and the Licensor, and 65% of the equity interests of specified foreign subsidiaries, to the Administrative Agent, and has granted security interests to the Administrative Agent in substantially all of its personal property (other than the assets of the Licensor). As additional security for Sassy, Inc.’s obligations under the 2012 Credit Agreement, Sassy, Inc. has continued its grant of a mortgage for the benefit of the Administrative Agent and the continuing Lenders on the real property located at 2305 Breton Industrial Park Drive, S.E., Kentwood, Michigan.

The Company paid fees and expenses to the Administrative Agent in the aggregate amount of $375,000 in connection with the execution of the 2012 Credit Agreement (the “Arrangement Fee”). In addition, the Company incurred a waiver and amendment fee of $375,000 to the Lenders (the “Waiver and Amendment Fee”). With respect to each of the Arrangement Fee and the Waiver and Amendment Fee, $187,500 was paid on August 13, 2012. The remaining balance of $187,500 of the Arrangement Fee is payable on the on the first business day following the Extension Date (prior to the November Amendment, such balance was payable on December 16, 2012); provided, that: (x) if all outstanding obligations under the 2012 Credit Agreement have been satisfied in full on or prior to the Extension Date, such balance shall be waived in its entirety; and (y) if the 2012 Term Loan has been paid in full on or prior to the Extension Date, $57,000 of such balance shall be waived (prior to the November Amendment, the applicable date to trigger such fee waivers was repayment by December 15, 2012).

In addition, the November Amendment provides that to the extent the consent of all the Lenders is obtained, the remaining unpaid balance of the Waiver and Amendment Fee will be payable on the first business day following the Extension Date (without such consent, such balance will remain payable on December 16, 2012); provided, that: (x) if all outstanding obligations under the 2012 Credit Agreement have been satisfied in full on or prior to the Extension Date, such balance shall be waived in its entirety; and (y) if the 2012 Term Loan has been paid in full on or prior to the Extension Date, $57,000 of such balance shall be waived (without such consent, the applicable date to trigger such fee waivers will remain repayment by December 15, 2012).

The Borrowers are also required to pay a quarterly commitment fee ranging from 0.30% to 0.50% (based on the Consolidated Leverage Ratio) on the daily unused portions of the 2012 Revolver (outstanding amounts under letters of credit are considered utilization for this purpose; outstanding swing-line loans are not so considered); letter of credit fees ranging from 1.75% to 3.00% (based on the Consolidated Leverage Ratio) on the maximum daily amount available to be drawn, plus fronting fees and other customary fees as are set forth in the 2012 Credit Agreement. In addition, in the event the 2012 Term Loan has not been repaid in full on or before December 15, 2012, the Company shall pay to the Administrative Agent for the account of the Lenders a fee (the “Catch Up Fee”) in an amount equal to the product of (i) 2% and (ii) the actual daily outstanding principal amount of the 2012 Term Loan from August 13, 2012 through the 90 ^th day thereafter (this fee may be accrued to the 2012 Term Loan at the Company’s election so long as there is no event of default on the day it is due). The November Amendment provides that to the extent the consent of all the Lenders is obtained, the Catch Up Fee would become payable if the 2012 Term Loan is not repaid in full on or before the Extension Date. The Company paid fees and expenses to the Administrative Agent and the consenting Lenders in the aggregate amount of approximately $180,000 in connection with the execution of the November Amendment. Each additional Lender that executes the November Amendment on or prior to November 30, 2012 will be paid a fee equal to 15 basis points multiplied by such Lender’s outstanding loans to the Borrowers.

Financing costs, including the fees and expenses paid upon execution of the 2012 Credit Agreement and the November Amendment, will be recorded in accordance with applicable financial accounting standards.